Impact of Political Uncertainty on Tanzanian Growth

Tanzania’s economic growth has been robust and amongst the highest in the region at an annual average rate of 6.8% from 2010-20151, which continued to improve to 7.0% in 20162. Economic growth is forecast to reach 7.1% in 2017, significantly higher than its regional counterparts, with Kenya’s GDP growth for the same period projected to be at 5.9%3. The country enjoys peace and stability with the Chama Cha Mapinduzi (CCM) having a comfortable majority in both mainland Tanzania and Zanzibar. CCM has a majority of 260 MPs out of 389. This has given the party a strong platform from which to implement its development and radical transformational agenda, and afforded the country a level of political stability. However, recent events on the legislative front have stirred a wave of unpredictability on the government’s policy direction, and heightened investor uncertainty.

FY2017/18, which began in August, ushers in the second year in the implementation of the country’s five-year development blueprint. Of the three anchors of plan – industrialization, human development and implementation effectiveness – public sector implementation effectiveness has gained much momentum. President Magufuli has taken a strong stance against corruption, improving public sector efficiency and encouraging servant leadership. In addition, the Tanzanian government has reinforced mechanisms for transparency to ensure that its citizens and other stakeholders can track government planning and policy implementation. The drive towards work ethics and efficiency will go a long way to curb bureaucratic constraints and improve the business environment in Tanzania.

The government has also made significant inroads towards industrialising and strengthening local agro-business. Tanzania agri-business received a major boost from the regional bloc, Southern Africa Development Community (SADC) through a three-year waiver on the SADC protocol on a trade that provided for tax-free imports of sugar. For the next three years, the government of Tanzania will levy an import tax on all sugar imports. Tanzania will now be able to protect its nascent sugar industry from competition from other SADC members. President Magufuli’s government has implemented several initiatives to improve the domestic business environment, resulting in the country moving 12 positions up from position number 144 to 132 out of 190 on the World Bank Ease of Doing Business Index 2017. Tanzania has ranked high for access to credit (44/190) and enforcing contracts (59/190) which should encourage investment and enhance the country’s image. Notwithstanding, more than 7200 businesses closed shop in FY 2016/17 due to lack of capital induced by high-interest rates, as well as unfavourable labour laws, which contribute to an increase in small business operating costs4. In addition, transportation costs remain high due to underdeveloped infrastructure across the country.

Tanzania’s economy continues to face threats to its stability and growth with regards to liquidity, investor confidence and the broader operating environment for its small to medium enterprises. The president’s arbitrary pronouncement and ad hoc policy shifts are threatening the investor confidence the country had been enjoying.

In efforts to ease the liquidity problem, the Bank of Tanzania (BoT) revised the discount rates further downwards from 12.0% in March 2017 to a record low of 9.0% in August 2017. This is expected to increase the money supply in the economy and encourage borrowing by companies and citizens. The recent move complements other efforts by BoT to stimulate the economy, such as the reduction of the Bank’s Statutory Minimum Reserve (SMR) requirement. While this should increase commercial bank lending rates, it could also affect the stability of the financial sector by increasing the likelihood of market failure if Tanzanians decide to call their deposits. Financial markets in Tanzania are already saddled with non-performing loans which now stand at a rate of 10.8%, up from 8.2% in 20165.

While the budget continues to show great intention with regards to fiscal prudence, reducing wastefulness and eliminating inefficiencies in the public sector, budget allocations raise some concerns. The 2017/18 budget proposes a raise in government expenditure 26.2% of the total GDP compared to 23.7% of GDP in the 2016/17. This comes amid anticipated shrinking government’s total revenue.

The Magufuli administration has also prioritised increasing government revenue through improving revenue collection, reducing leakages and illicit capital flows, and creating a well-regulated macro economic environment. In this regard, the government recently released the Mining Act, Petroleum Act, Incomes Act and the Insurance Act. In addition, the country approved the Permanent Sovereignty Act 2017. This comes at a time when there is a major standoff between the government of Tanzania and Acacia Mining Plc. Acacia Mining company is accused of intentionally misleading the government by undervaluing its production output from its mining activities, failure to declare actual quantities of other precious minerals found and in the process short-changing the government on tax revenue. The Magufuli administration also contends that Acacia has been operating without due licensing.

The government, through the amended Mining Act and the Permanent Sovereignty Act, has sort to consolidate its position as the custodian of natural resources, through increasing the government’s stake in mining operations to 16.0%, and to do away with international third-party arbitration of mining disputes. The laws further empower the government to renegotiate all mining contracts. The move has drawn mixed reactions. The reaction from international investors has been muted, while mining firms such as AngloGold and OreCorp of Australia have signalled their uneasiness with the new laws. However, other investors and development actors, like Bill Gates of the Bill and Melinda Gates Foundation, have expressed their approval of Mr Magufuli’s action oriented approach to government business.

The move in the stand-off between the government of Tanzania and Acacia has also exposed fissures in CCM, as functionaries loyal to President Magufuli’s predecessors are uneasy at the implications of the ongoing debate that Acacia was allowed to operate illegally under both President Benjamin Mkapa and President Jakaya Kikwete. This is further accentuated by the anti-corruption drive that some perceive to be targeted at the senior bureaucrats and influential CCM party members appointed by President Kikwete under CCM patronage arrangements6. The president has further sent tremors through his own party by demanding that MPs who are underutilising factories should return them. This might destabilise the country, as influential MPs might decide to stall the President’s reform agenda. Transforming CCM from an old revolutionary party, whose solidarity and unity is hinged on patronage, into a modern political party remains a challenge for Magufuli.

As things stand, the economic health of Tanzania has to be viewed in the short to medium term and the long term. The country, on one hand, is likely to continue with its steady growth into the foreseeable future. However, the investor community needs the reassurance of policy consistency and predictable economic growth. It is unlikely that there will be a wholesale withdrawal by international investors, but the government will have to reinforce its commitment to creating an investor friendly environment. The international community is likely to keep an eye on President Magufuli with regards to the respect of basic civil and political liberties.